Cognitive biases are found in many businesses. Probably the most extreme example in recent history is the Enron case. Beyond the aggressive accounting techniques the organization used, executives fell victim to multiple cognitive biases that made them overconfident in the business despite risky financial practices.

While cognitive bias is not uncommon, if it’s left unchallenged, especially in accounting and financial reporting, it can prove disastrous for the business.

A Crash Course on Cognitive Bias

What are Cognitive Biases? Cognitive biases are predictable, typically emotionally based, pathways that deviate from objective standards of thinking. The brain relies on them to make quick decisions, but due to their unconscious nature, they can lead to problematic issues with reasoning.

Key characteristics of cognitive biases include:

• They tend to occur without any conscious awareness that they are happening.
• They usually follow predictable and consistent patterns based on how an individual recalls information.
• Personal viewpoints and emotions are typically the basis for the shortcuts.

According to organizational psychologist Dr. Amanda Ferguson, “Cognitive bias occurs as a result of taking a shortcut… the consequence of that is that you’re not interrogating information in the way you probably should be, because you’re just defaulting to what your brain’s telling you is the easiest way.” Challenging one’s own reasoning is the first step toward better decision-making.

Common Cognitive Biases in Accounting

When it comes to accounting, cognitive biases can be just as detrimental, skewing company financials and analysis, and resulting in incorrect audits and decisions.

• Confirmation Bias: Ignoring information that contradicts preexisting notions. This can cause the accounting professional to miss errors or inaccuracies.
• Overconfidence Bias: Placing too much emphasis on existing knowledge, causing a lack of verification or incomplete analysis.
• Anchoring Bias: Leaning too much on a prior year or starting number, even when further analysis demonstrates the number is incorrect.
• Availability Bias: Putting more emphasis on data that is remembered more readily or easily, rather than what is most up-to-date or relevant.

Being aware of these cognitive biases and mitigating them is critical for accuracy. If left unaddressed, the audit process and compliance will remain vulnerable, calling financial statements into question.

Practical Strategies to Overcome Cognitive Bias

How can a professional overcome cognitive bias? The solution is multi-threaded, combining awareness with structured tasks and processes.

Take a look at these practical strategies:

1. Introduce or Increase Education and Training: Accountants and auditors need training on what cognitive biases are and how decisions can be skewed by them.
2. Encourage Professional Skepticism: Any data source, assumption, or data representation should be questioned and checked.
3. Use a Structured Methodology: Implement a checklist, framework, or model for decision-making to reduce reliance on intuition. Involve more people in the decision to reduce the risk of individual influence.
4. Swap Roles and Tasks: Allowing an individual to work on a different task introduces a new perspective and a way to potentially discover problems that someone else may have missed.

Data Analytics: The Ultimate Defense Against Bias

What doesn’t have emotion in the financial reporting game is data. Thus, using data-driven strategies and data analytics is highly effective in helping overcome cognitive biases, especially the dangerous availability Bias (relying on outdated data).

• Enhanced Accuracy: Data analytics can automate calculations and identify patterns that are not readily uncovered by the human eye, resulting in dependable financial reports.
• Real-Time Insights: Data analytics opens up access to real-time data with a dynamic view of financial performance. This means leadership can perform more timely, rational decision-making.
• Risk Management: Identify and mitigate risks by analyzing large datasets and highlighting threats through automated analysis.
• Increased Compliance: Real-time information ensures compliance by identifying potential issues so they can quickly be resolved.

Improve Data Analytics (and Cognitive Biases) with ExtendInsights

Fortunately, there are several tools available to finance teams that can help offset the weight of cognitive biases. Data integration plays a key role by ensuring reports are always filled with to-the-moment information for informed decision-making.

That’s one of the many reasons we built ExtendInsights, a direct integration app that connects data sources like NetSuite, HubSpot, Salesforce, and more to Excel.

ExtendInsights allows you to:

• Pull data for data analytics through automated reporting.
• Manage data with upload and writeback features (available for NetSuite and Salesforce) to ensure systems are updated with the most accurate numbers.
• Refresh Excel reports to reflect real-time numbers on a regularly scheduled basis or on demand with a single click.

Cognitive biases are inevitable when humans are making decisions, but they don’t have to drive business outcomes. Using data to build an accurate and bias-aware story will help overcome these biases and support informed, rational decisions.

See how ExtendInsights can fight cognitive biases in your org with a free two-week trial.